Liquidity requirement drives Sweden to borrow more than needed

Liquidity concerns have led the Swedish National Debt Office (Riksgälden) to announce target borrowing greater than required by the state’s finances.

The decision comes after analysis of maturity and debt levels changing over time, also in mind that borrowing requirements may increase in future.

“The option to keep a certain yearly borrowing volume should constitute a cheap insurance against the risk that liquidity and infrastructure deteriorate. Furthermore, the asset portfolio can function as a buffer and provide a certain protection in the short run during, if any, future crises,” the Office stated.

Although Sweden’s borrowing requirements are currently low, the Office says that “a steering that is too tight risks becoming inefficient and costly.”

“As the borrowing volume in comparison to the outstanding debt issues will have a small effect on the composition of the debt. Unexpected deviations from the forecast of the borrowing requirement will also have a larger impact on the total average time to maturity”

The Office proposes the following guidelines for the maturity of the government debt:

– The time to maturity of the nominal krona debt for maturities up to 12 years should be between 2.7 and 3.2 years

– The outstanding volume of instruments with maturities longer than 12 years should at most be SEK65bn

– The maturity of the foreign currency debt should be 0.125 years

– The maturity of the inflation-linked debt should be between 7 and 10 years

“We propose no changes of the composition of the government debt. The composition will then remain 60 per cent nominal krona debt, 15 per cent currency debt and 25 per cent inflation-linked debt,” it added.

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